I have begun uploading work-in-progress chapters for an innovation management textbook that I am working on. The idea of the textbook is to provide an introduction to foundational ideas in innovation management (it is described here in more detail) and you can see the evolving manuscript here.

 

The book is going be composed of a series of essays (generally) no longer than 2.000 words introducing a key idea in innovation management. Below is a sample chapter, the first of the book, describing Schumpeter’s concept of Creative Destruction. I am of course happy (even grateful) for feedback, so please send me your thoughts on this and subsequent chapters.

 

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Schumpeter: Creative Destruction

The signs of creative destruction are all around us. As consumers, we are incessantly presented with new products, services and solutions. Things that were once stables of everyday life disappear. We regularly find out that we need things that were until recently nonexistant, even unimaginable. What we recognize as the largest companies, those that most dramatically shape our consuming lives by providing us with all this novelty, are mostly new ones. Just a generation ago, many of them either had not been founded or were in their absolute infancy. The technologies that these companies use similarly did not exist a generation ago. The same can be said of the technologies that shape our working lives. More and more of us work or will work in jobs that a generation ago made up a small share of the overall workforce or simply were not invented. We will also fulfill those jobs under organizational arrangements that are new. If you live in a Western city, you will see what were once factories being turned into fashionable housing and offices for a new kind of work and for a new kind of production. This churn, this constant change, is Creative Destruction unfolding.

 

Schumpeter’s book Capitalism, Socialism and Democracy was written in 1942, amidst the horrors of a World War and at a time when many were deeply disillustioned with capitalism as an economic system. While many today share the disillusionment with capitalism, the real difference between then and now is that in the 1930s and 1940s socialism really was an alternative, with a substantial share of the world’s population living in socialist economies. At the time, many looked to the the Soviet Union and saw a well-functioning economic model, while in the West they would see something not quite undesirable. They would often not see the free markets and perfect competition on which capitalism is predicated, but monopolies and think (with Adam Smith in mind) that this had to be economically inefficient and (with Karl Marx) that the tendency towards monopolies was inherent in capitalism, as was exploitation of the working class. If you looked, you might see the same today. They would also see vast inequality, with incredible wealth held by what we would call the 1% and the 99% suffering through a desperate Depression.

 

Schumpeter’s book was an effort to understand to socialism and capitalism and their respective relationships with democracy. In what is perhaps the most concise characterization of capitalism ever written, this would be Schumpeter’s argument: “Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

 

To understand that, we need to understand how Schumpeter thought about capitalism. “The essential point to grasp”, he writes, “is that in dealing with capitalism we are dealing with an evolutionary process… Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary” (p. 82). Capitalism is inherent unstable and dynamic. To live in a capitalist economy is to live in circurmstances that, for better and worse, constantly change. In later chapters, we will return to both the better and the worse.

 

There is a deep poetry, I think, to Schumpeters account of this constant change. Creative Destruction is a very evocative and quite intuitive way to capture something that is truly profound: that capitalism implies a constant ‘industrial mutation’ that “incessantly revolutionize the economic structure from within [italics in original], destroying the old one, incessantly creating a new one”. To him, there is a storm, a ‘perennial gale of creative destruction’ blowing through capitalist society, like the Hindu god Shiva dancing through the world, tearing down what is and letting the new emerge from the ashes.

 

While we may not appreciate the causes of this process or the profundity of its implications, the threat of creative destruction is keenly felt by businesses. Schumpeter talks about creative destruction as an ‘ever-present threat’ (p. 85), one that ‘disciplines before [competition] attacks’ (p. 85). It creates a paranoid anxiety for firms that they must compete not just in the short term on price and quality by constantly marginally improving. This is the kind of competition that firms are always in. In the slightly longer term, they also have to deal with “competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is a much more effective than the other as a bombardment is in comparison with forcing a door” (p. 84-85). The threat of such creative destruction constantly looms, even over monopolies, and makes them act as if they were in a state of cutthroat competition, because even if they are not currently competing they still compete against future entrants to their industry that will seek to overtake their position.

 

For Schumpeter, innovation is the fundamental impulse spurring creative destruction, the force that propels change in the economy. He employs a relatively broad definition of innovation, covering “new consumer’ goods, new methods of production or transportation, the new markets, the new forms of industrial organization” (p. 83). From this broad definition come several sub-classifications that are worth noting for their own sake – as we will return to, they each have their own set of causes and effects on organizations. Today, we tend to use that as the definitional starting point for distinguishing between different forms of innovation. Product innovation is what people typically think about when they think of innovation, because it refers to either new physical products or (increasingly) services. These tend to be highly visible. Process innovation covers new techniques or tools for creating products or services. These tend to be less visible, because they often are sold in business-to-business markets, but are indisputably important.  Organizational innovation covers new ways to organize work and production. It seems like a natural thing today, but the corporation as we know it today did not always exist, but was actively invented.  Market creation refers to the opening up of new markets, whether by extending the geography in which a solution is marketed or in extending technologies into new fields. Innovations in transportation get relatively little attention in most modern innovation research, but is nonetheless profound in its consequences (consider the implications that the humble 40-foot container has had on global trade).

 

The most important thing to understand about these five forms of innovation, however, is that they together create what Schumpeter would surely see as the miracle of capitalism. They allow for the long-run expansion of output and the driving down of prices, putting goods and services that were once only accessible to the hyper-rich into the hands of all of us. Innovation is what allows all of us who are fortunate enough to be born into the affluent societies of the Western world to enjoy standards of living that were frankly unimaginable just 200 years ago. While capitalism has incredible downsides and creates gaping holes in our souls as both workers and consumers (as we will return to), the kind of growth in material wealth that it has created is a miracle that is unprecedented in world history, as Deirdre McCloskey’s work will make eminently clear.

 

Going forward, we are going to see creative destruction come up again and again as a mainstay of innovation management theory. We will see it as the constant threat that Schumpeter describes. In this capacity, all the various ways that established firms and industries could be destroyed by innovation weigh heavily (and should weigh heavily) on the minds of the those firms. We will see the dilemma that it poses between competing at the margins and at the center of profits as constitutive of one of the key challenges of innovation management: of balancing exploration and exploitation both at the level of the firm allocating its resources between different activities and at the leel of how a technology should be developed. We will also see it as an opportunity. Just as innovation can destroy, it can also elevate new entrants and new ideas to prominence. Attackers can have advantages over incumbents and creative destruction is something that people can actively try to bring about. We will see the sense of turmoil that Schumpeter describes as a stable of industrial change, but also as something that firms try to bring to an end. We will see the tension between the immaculate wealth creation and the far-reaching and painful destruction as a key challenge facing society. And we will see how the constant flux, the constant search for new and better alternatives is currently re-shaping the way innovation happens and firms organize. We live, for better and for worse, in fantastically interesting times and understanding innovation and its implications is a central part of understanding them.